Mark Milke is a Calgary author and keynote speaker.
In her 2007 book The Forgotten Man, which traced the decline of the U.S. economy in the 1930s, author and syndicated columnist Amity Shlaes noted how that era’s economic cratering, signalled but not caused by the 1929 stock crash, was exacerbated by the protectionist Smoot-Hawley Act. Named after its Utah and Oregon sponsors, the bill imposed higher tariffs on 20,000 goods from other countries.
That anti-free-trade law is worth remembering given that in the presidential election just ended, Republican Donald Trump and Democrat Hillary Clinton discussed little policy with the exception of free trade, which they both bashed.
Mr. Trump attacked the 1994 North American free-trade agreement (“the single worst trade deal ever approved”). Ms. Clinton flip-flopped on her earlier support for Trans-Pacific Partnership negotiations. In doing so, both candidates damaged the prospects for open markets, rules-based trade and more prosperity worldwide.
Thus, it’s fact-checking time on free trade – including NAFTA, given its status as a political punching bag.
The U.S. Congressional Research Service, which gives non-partisan analysis to members of Congress, analyzed NAFTA in 2015. Its assessment: “In reality, NAFTA did not cause the huge job losses feared by the critics or large economic gains predicted by supporters.” The report found the net overall effect of NAFTA on the U.S. economy “appears to have been relatively modest.”
The effect was minimal because the U.S. economy was such a large market to begin with. Moreover, as the same report noted, since NAFTA came into effect, U.S. trade with Canada and Mexico “more than tripled,” which is of no small benefit to all three countries, including the United States.
Another useful fact: According to Baruti Libre Kafele with the Atlanta-based Foundation for Economic Education, in the past 20 years, in inflation-adjusted terms, U.S. manufacturing output has increased by 40 per cent. Also, the U.S. economy now produces twice as many products as it has in any year dating back to 1984.
In other words, the U.S. economy is more productive. That, along with technological change, helps to explain at least part of the manufacturing job losses pointed to by American critics of more open trade.
To be sure, the benefits of worldwide trade liberalization have been uneven: Measuring from 1988, economists Branko Milanovic and Christoph Lakner did find that middle-income earners in Asia reaped significant income gains compared with the American middle class. But that statistic is unsurprising: East Asia was far behind the developed West in the postwar world, so “catching up” was to be expected.
Here’s the bigger picture for protectionists: In the past 50 years, as economists Maxim Pinkovskiy and Xavier Sala-i-Martin have found, more than 600 million people worldwide were lifted out of the most extreme form of poverty (those living on a dollar per day or less, adjusted for inflation). This occurred in part because of an increasingly free-trading world, not in spite of that development.
Back to Smoot-Hawley and its would-be modern imitators. In May, 1930, more than 1,000 economists signed a letter urging president Herbert Hoover to veto the legislation, predicting economic disaster if the bill became law. Hoover signed the bill in June, and true to the economists’ prediction, it was all downhill after that.
Smoot-Hawley forced consumer prices higher, this in an already-contracting economy. Less money chased more expensive goods, a guaranteed recipe for higher unemployment. The protectionists had their way, with a subsequent savage toll on workers in the United States and worldwide.
One should not wish for a protectionist repeat performance in this century. Modern-day advocates of Smoot-Hawley don’t have the facts on their side, the most pertinent of which is that freer trade benefits the poor most of all.
Last year, economists Pablo Fajgelbaum and Amit Khandelwal found that moving from more restricted trade to more open trade benefits all consumers, but some more than others. For example, higher-income consumers around the planet gain 28 per cent in their purchasing power when free trade expands.
Here’s the effect of free trade for the bottom 10th of consumers: a 63-per-cent increase in real purchasing power. As the authors note, this is because “poor consumers spend relatively more on sectors that are more traded, while high-income individuals consume relatively more services, which are among the least traded.”
As the authors write, and in support of free trade: There can be and is a “pro-poor bias of trade in every country.”Report Typo/Error
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